Health Care: Great for the Economy Today, Terrible Later

HEALTH CARE

Health Care: Great for the Economy Today, Terrible Later

Hospitals like Pittsburgh’s UPMC created enough jobs to end the recession. If they keep it up, they’ll wreck the economy.

By Margot Sanger-Katz

PITTSBURGH—Gerardo Sciulli was a welder from a small town in the Abruzzi region of Italy. So when he emigrated to America in 1970, he chose this place; its vibrant steel mills assured him plenty of work. He settled with his family in Oakland, a half-square-mile neighborhood east of downtown.

Today, the steel mills are gone, and Oakland is the seat of Pennsylvania’s health care industry. It contains a complex of interconnected hospitals, a medical school, doctors’ offices, and towers of University of Pittsburgh medical labs (which bring in some $450 million in federal grants every year). UPMC—the huge local health care provider, which is expected to pull in $10 billion in revenue this year—owns 16 hospitals in the metro area and is the largest private employer in the state.

All of which made a strong impression on Marc Sciulli, Gerardo’s 29-year-old son. By the time Marc started college, he knew he wanted a career in health care. Now, after his first few years as a hospital pharmacist, he earns nearly double what his father did (more than $80,000 a year), owns his own home, and plans to make his life in the city. “I think just living in Oakland—being around the hospitals and the colleges—pushed me in that direction,” he says.

Health care—which adds thousands of jobs in hospitals, nursing homes, and doctors’ offices each year—is at the center of this recovery. The sector pulls in federal Medicare dollars to serve the region’s aging population and research grants from the National Institutes of Health. It offers middle-class positions to nurses, technicians, accountants, computer programmers, and other professionals. UPMC may not replace the steel industry, but it has taken over the old U.S. Steel building downtown, and its logo looms large atop the city’s skyline.

Health care is the leading-edge of a nationwide trend. The number of jobs in this sector is climbing steadily, in contrast to the erosion in so many other areas of the economy. Since the Great Recession began in December 2007, health care jobs are up nationwide by 10.5 percent. Compare that with all other nonfarm jobs, which are still down 4.3 percent, even after recent gains. If the health care economy hadn’t grown during that period, the national unemployment rate would be 8.8 percent, a full point higher than it is, according to calculations by the Altarum Institute, which tracks the industry. If health care jobs had plunged like those in other sectors, U.S. unemployment would be a staggering 10.8 percent. Employees like Sciulli kept the country afloat. “In the short term, think of the health sector as being a stimulus program: It just keeps generating jobs and money,” says Charles Roehrig, director of Altarum’s Center for Sustainable Health Spending.

But the long term may not be as rosy—for Pittsburgh or for the country. The growth in the health care sector also produces ever-growing costs. Health spending, nearly 18 percent of the U.S. economy, is contributing to personal bankruptcies, driving up the cost of domestic labor, and crowding out other government priorities (infrastructure, say, or education). That’s a problem in Pittsburgh, too, where the city has spent the last nine years in a form of municipal bankruptcy, after retiree pensions and employee health benefit costs crushed the budget.

It’s an example, in miniature, of what could happen nationally. Federal health entitlement programs alone are projected to balloon from less than 6 percent of gross domestic product today to more than 10 percent in 2037, according to the Congressional Budget Office, when they will exceed spending on all other government functions except Social Security. About half of that increase can be blamed on our aging population and the expanded benefits under the 2010 Affordable Care Act, but the other half represents what health economists call “excess cost growth”—the annual increases in spending for each person’s care. A health system this pricey won’t be able to keep adding good jobs like Sciulli’s without acting like ballast. “It’s a good thing for now, but as the economy begins to recover and we don’t need those health care jobs, we’re going to be desperate to reduce the growth rate in health spending,” Roehrig said. “Because we just can’t afford it.” The health care boom that is propping up the American economy, could eventually come back to haunt us.

THE FUEL

Through the mid-’70s, Pittsburgh had a vibrant economy. Steel mills in and around the city offered high salaries and plum benefits to workers right out of high school. Then international competition torpedoed steel prices, and the industry collapsed. Nearly all of the region’s mills closed within a five-year period. Unemployment rose to more than 18 percent, and union membership fell. “Growing up, I didn’t know anybody who didn’t work in the steel mill, and now I don’t know anybody” who does, says George Fechter, 66, an entrepreneur who invests in health care start-ups. Working-age people quickly left town. “In the early 1980s, they moved out using U-Hauls. Later on, they were moving out due to hearse.”

Hospitals moved into the economic vacuum. Allegheny County, which includes Pittsburgh and many of its suburbs, now has the second-highest proportion of seniors of any county in the nation with a population over 1 million (after Florida’s Palm Beach). All those Medicare beneficiaries gave local hospitals a solid base of paying customers. A few smaller community hospitals closed, but many survived. UPMC, a nonprofit affiliated with the University of Pittsburgh, began expanding rapidly, buying up hospitals in the region and building up high-revenue specialties such as organ transplantation and oncology.

People in town like to credit the economic recovery to the combination of “eds and meds.” In addition to the big hospitals, Pittsburgh is home to two major university systems—Pitt and Carnegie Mellon University—with grant-winning research programs, along with more than a dozen other colleges. The University of Pittsburgh, with its medical school, has been a big breadwinner for the city. It hired a former top NIH official, and Pitt now ranks fifth in the country among universities collecting NIH grants—more than Yale, Duke, or Stanford.

Health care and social services represent about 10 percent of the Pittsburgh economy and 16 percent of its jobs, compared with averages under 8 percent and 13 percent nationally. It’s not the only business in town: Finance and high-tech jobs have grown, too. Google and other national corporations have chosen to open offices here. But it is health care that has grown steadily, in jobs and revenue, even when other industries have stagnated.

That’s why Tia Tomasic, 24, who grew up outside the city in North Huntingdon, always saw a job in health care as the safest way to a stable, rewarding middle-class career. In high school, she began volunteering in the nearby hospital. At first, she helped greet new patients and escort them to their rooms. Then she filed and circulated medical records, back when everything was paper. Tomasic began to realize how important the records were, and how much she could enable care even far from the bedside. So she sought out colleges with health information-management degrees. Many of her classmates also chose health careers, particularly nursing. “There are opportunities,” she says simply.

Hers is a good career. Tomasic earns between $40,000 and $50,000 per year and expects to do better and better as the field expands. As more hospitals and doctors switch from paper to electronic records, demand is rising for professionals who can manage them. Tomasic helps medical practices set up electronic systems and works out the kinks once they’re online. The job involves a range of skills—customer service, training, computer science. She works in a row of taupe cubicles in a new building on the banks of the Allegheny River, just a few blocks from the flagship hospital of the West Penn Allegheny Health System, which employs her, but she frequently travels around the region to help practices on site. “It’s never boring,” she says.

Her hospital chain is also helping to pay for her M.B.A., a degree that may open up other opportunities on the business side of hospital administration. That sort of professional development is not unusual in town. UPMC is so eager for trained nurses and technicians that it, too, offers substantial tuition assistance for employees who want to earn advanced degrees. Although the field has its share of low-wage jobs, health care offers an unusual range of opportunity for career growth and upward mobility.

At UPMC’s Shadyside School of Nursing a few miles away, 20 students are sitting around tables, taking in a lecture on intensive-care nursing. Shadyside offers a diploma in 22 months, and nearly every student in the classroom is enrolled in a loan-repayment program through the university. If they agree to work for the health system for two years, they won’t have to pay back their loans. “Basically, you’re guaranteed a job,” says Jacki Hammond, 19, the only student in the class to come straight from high school. Ann Harmon, 36 years old and beginning a second career, is a more typical student. She already works for Shadyside Hospital as a pharmacy technician; she returned to school after she felt she had “hit her ceiling” there. During a classroom Q&A about intravenous nutrition, Harmon knew all the answers: She’d spent years making the formulas in her pharmacy.

Stoker herself has ascended the career ladder. She started in intensive-care nursing at Shadyside Hospital after earning a bachelor’s degree. Then she used tuition assistance to get her master’s. Now 35 and a mother of two, she’s working on her doctorate. Her father, who built motors used in steel mills, managed to keep his job through the closings, but he knew he was lucky. Stoker, by contrast, knows she’ll never lack for job security. “There’s always a place for me at the bedside, in a nursing home, or in the community,” she says. “I could find a job really easily.”

ASSET AND LIABILITY

Many of the same factors that propelled Pittsburgh’s economy are driving the nation’s health-sector growth. As the population ages, demand for health care rises. Electronic records and new payment systems are encouraging hospitals and providers to merge, creating large integrated systems, even as manufacturing’s job base shrinks. Hospitals have been eager to take credit for economic growth: A report published by the American Hospital Association last week estimated that hospitals alone provide 5.5 million jobs nationwide and “create $2 trillion in economic activity.”

Yet cities won’t be able to ride a health care employment wave forever. Although Pittsburgh has used the industry to bring federal tax dollars into its local economy, those streams are drying up. The Affordable Care Act will lower future hospital payments, and proliferating new payment models are designed to encourage more efficient care around the country. The ongoing deficit debate suggests that funding streams from Washington may dwindle even more: Any big entitlement-reform deal will mean significant reductions in long-term Medicare spending. If automatic spending cuts kick in next month as part of the federal budget sequester, they will zap not just Medicare reimbursements but also the NIH grants that keep the Pitt labs humming. “We’re really running happily in this protected bubble,” says Dr. Wishwa Kapoor, a professor and the director of the Center for Research on Health Care at the University of Pittsburgh. “But things are going to fall apart.”

Across the country, growth will likely be constrained by what communities can afford. Unlike manufacturing, health care is generally not an export business: Patient care is provided in the community and must be paid for with local resources. “What you’re doing is passing some money from one person to another,” says Martin Gaynor, a health economist at Carnegie Mellon. That imposes a wealth-based ceiling on every region’s health sector.

Pittsburgh is already struggling against those limits. As the health care industry grew so quickly, it relied on higher-than-usual utilization of services. Local patients get 47 percent more advanced imaging procedures than people elsewhere, according to an analysis by the BlueCross and BlueShield Association. They get 44 percent more lab services and 27 percent more outpatient surgery. Pittsburgh also records more emergency-room visits and hospital “bed days” than comparable cities, according to a recent Dartmouth College study.

In the current system, where insurers pay providers for each test and surgery they perform, more services mean more revenue. (But they don’t necessarily produce healthier patients: Allegheny ranks in the bottom half of Pennsylvania’s counties on a series of population health measures conducted by the Robert Wood Johnson Foundation.) The new models are meant to clamp down on unnecessary care by paying providers for health outcomes instead of treatments. If they work, they will reduce the profitability of all those MRIs and blood tests.

In the meantime, high utilization makes health insurance expensive for local businesses. An analysis by the Milliman Group found that the average Pittsburgh resident spends 25 percent of her income on insurance—substantially more than in similarly sized cities such as Baltimore, Cleveland, Philadelphia, and the Washington metro region. “It makes the region far less competitive for businesses” that could open elsewhere, says Harold Miller, president of the Pittsburgh-based management consultancy Future Strategies. He says that executives in large companies have told him they declined to expand locally because of high health care costs. “Joe’s barber shop has to live with the fact that it might have high health care premiums, but a worldwide manufacturer says, ‘I’m not going to put a plant in Pittsburgh, because my health care costs may be higher here.’ ”

Those costs also make public-employee benefits pricey. The city has struggled to cover retirees, whose expenses, along with underfunded pensions, bankrupted the city about 10 years ago. Now, health care for current and retired workers represents 10 percent of the city’s budget, without fully funding its future retiree benefit obligations, according to an analysis by Public Financial Management, a public-sector finance consultancy. The strain has led Pittsburgh to postpone road-paving, scale back public transportation, and avoid other infrastructure improvements. The fact that the hospitals and universities pay no taxes—they’re nonprofits—hasn’t helped.

The high and rising costs of the U.S. health care system have also driven up the cost of labor, making American workers expensive in comparison with foreigners. The United Steelworkers is still based in downtown Pittsburgh, in a skyscraper with an elaborate steel façade, but its footprint has shrunk. Leo Gerard, the union’s international president, cites health care costs as a key factor sapping its clout in negotiations with employers. He estimates that businesses that employ American workers begin with an 18 percent disadvantage compared with other Western countries, where health benefits are less expensive. “You can’t sustain an economy over an extended period of time where you’re relying on middle-class consumers, health care costs have double-digit increases, and wages are declining or stagnant,” Gerard says. The mounting costs have essentially erased U.S. income gains over the past 10 years, according to a Rand study.

A BLEAKER FUTURE

In the short term, the Affordable Care Act will create even more health care jobs. But over the long term, it is likely to push down salaries, not in­­- flate them.

Some 40 million uninsured Americans stand to benefit from the law’s new subsidies in the next 10 years. And evidence suggests that once they get insurance, they’ll seek more care. At the same time, the programs to reduce utilization will exert significant downward pressure on health spending. Hospitals have begun facing penalties if too many patients who leave the hospital return within 30 days. Soon, doctors will begin earning bonus payments based on how their care measures up to quality standards.

In doctors’ offices, health care professionals are trying to work “at the top of their license.” Nurses, instead of doctors, administer flu shots. Medical assistants, instead of nurses, take patients’ vital signs. Medical assistants can check blood pressure. This transformation may not reduce the total number of jobs, but it could push the distribution of health professions down the income scale. You don’t need an M.D. to phone a patient and ask him his weight or remind him to come in for a blood test. Indeed, the fastest-growing subspecialty is home health. Aides in this field require minimal training and command low salaries, but they can help prevent the kind of catastrophic health problems that lead to expensive hospitalizations.

Sciulli, the young pharmacist, is already part of this experiment. Traditionally, hospital pharmacists have been cloistered in basement labs, where they accept orders, review charts, and fill prescriptions. Sciulli, by contrast, practices on a patient floor alongside doctors and nurses. He visits his patients daily to catch medication side effects, and he meets with them before they’re discharged so they understand what drugs they will need to take at home. “We’re able to follow the patients much more closely,” Sciulli says. The hope is not only that pharmacists’ increased involvement will reduce costly errors but also that it will shift some work traditionally done by doctors, who are more expensive. Meanwhile, pharmacy technicians—cheaper still—can do the simpler work of compounding and distributing drugs.

Recent evidence suggests that it may be possible to have a strong health care sector without cost spikes. The growth in national health care spending has been unusually low over the past three years, according to the Health and Human Services Department. In 2011, the most recent year with complete data, the growth matched that of the economy overall. Traditionally, labor costs have represented the majority of health spending, but in the future, hospital systems might be able to add jobs without adding as much total cost. The downside may be middle- and lower-class positions that will feel the economic pinch. According to an analysis by the local Service Employees International Union, which is trying to organize health workers in Pittsburgh, the median “health support” job in the region already pays less than what local economists deem a “self-sufficiency standard” in the state, a wage of $12.50 an hour. At those rates, workers are often struggling to pay their rent and leaning on public assistance, not boosting other industries.

Jim Staus, 51, has been working at UPMC’s Presbyterian Hospital in supplies—stocking hospital floors with syringes, gauze, and other essentials—for seven years. Born in Pittsburgh, he pursued an associate degree in a health care field because he thought it was where the opportunities lay; he came to his position after 10 years in a similar job at West Penn. But Staus still earns just $11.81 per hour, and his family relies on food stamps, heating assistance, and food pantries to make ends meet. It’s cause for disillusionment, he says. He’s hoping to organize with his colleagues and join SEIU, but for now, he doesn’t see himself leaving or getting promoted anytime soon. “With the economy the way it is, and the job situation, I’m kind of stuck,” he says.

Jeffrey Romoff, the CEO of UPMC, has overseen the rapid growth of his organization from a small community-hospital group into a health system with international clout. So far, his strategy has focused on leveraging payment systems to maximize revenue—building up high value Medicare services and using a consolidated market to extract maximum payment from private insurers. But he realizes that the old models will not yield continued growth in the new payment environment. Romoff hopes UPMC can pioneer other ways to thrive—and then sell those models to other hospitals. It has already started managing international hospitals, including facilities in Italy and Ireland. And Romoff sees steel as a cautionary tale: He watched a dominant industry that provided good-paying jobs essentially disappear after it failed to adjust to market changes. “You can’t argue in a growing economy for sustaining the status quo when the status quo is unsustainable,” Romoff says.

So while Pittsburgh and the country will enjoy the stimulative boost of health care spending for a few years more, a correction is coming. The economy will need to find other sources of growth or else face major problems.

Southwestern Pennsylvania may have already found its next big business, as local exploration has discovered the region’s rich energy reserves. Perhaps Sciulli’s children, too, may pave their own way—this time as “frackers.”

CLARIFICATION: An earlier version of this story reported Tia Tomasic’s salary as “about $45,000.” She told National Journal she earns between $40,000 and $50,000.

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This report is part of a series supported by a fellowship from the Association of Health Care Journalists.